1. Basic Finance

2. Basic Finance
Owning and operating a business requires financial know how. Basic financial operations include understanding what it takes to start-up a business.

3. Basic Finance Definition:
Start-up costs are pre-opening, one-time expenditures incurred to start a new business.

4. Basic Finance Start-up cost examples: Utilities hook-up
Initial equipment costs
Site renovation
Advertising for opening business
Initial salaries (pre-opening)
Employee training

5. Basic Finance Personal Sources of Financing Sweat Equity
Personal Savings
Mom & Dad
Friends & Family
Second Mortgage
Personal Loan

6. Basic Finance Personal Sources of Financing continued Bootstrapping
Bartering
Credit Cards

7. Basic Finance Business Sources of Financing Business Associates
Customers in Hand
Suppliers/Vendors
Seller Financing
Prospective Employees

8. Basic Finance Business Sources of Financing continued
Joint Ventures/Partners
Inventory Financing
Equipment Financing

9. Basic Finance Banks – SBA – Lending Programs Commercial Loans
Lines of Credit
SBA Guarantee Loans

10. Basic Finance Angel Investors
Are less likely to seek controlling interest
May want to participate in the business
Typically invest in “local” activities
Require good rate of return and want out of the investment in 3-7 years

11. Basic Finance Angel Investors Continued High net worth individuals
Typically experienced entrepreneurs or business executives
Investment range of $25,000-$500,000
Some prefer to invest in groups

12. Basic Finance Venture Capital Primarily a U.S. phenomenon
Generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, and wealthy individuals

13. Basic Finance Venture Capital Continued
Finance new and rapidly growing companies
Purchase equity securities
Add value through serving on boards, contacts, and future fundraising
Take higher risks and expect higher rewards
Have a longer-term orientation

14. Basic Finance Financial Management Balance Sheet Cash Flow Statement
Income Statement
Ratio Analysis

15. Balance Sheet

16. Basic Finance Balance Sheet Definition:
Accounting statement that reports a company’s financial position as of a specific moment in time.

17. Basic Finance
Assets: a physical object or right that has a monetary value.
Current Assets: assets expected to be used, sold, or realized in cash within one year.
Long-Term Assets: tangible assets that are of a permanent or relatively fixed nature.

18. Basic Finance Liabilities: debts owed by the business.
Current Liabilities: debts payable within one year.
Long-Term Liabilities: future debts payable beyond the current year.

19. Fundamental Accounting Equation: Assets = Liabilities + Owners Equity
Basic Finance
Equity: Owner’s claim against assets after
the liabilities have been deducted.
Value of what you own - debts you owe = net worth
Fundamental Accounting Equation:
Assets = Liabilities + Owners Equity
(net worth)

20. Basic Finance
Example
Balance
Sheet

21. Basic Finance

22. Basic Finance
Answer
Key

23. Cash Flow

24. Basic Finance Why does an entrepreneur worry about cash management?
Cash pays operating expenses
Cash pays for inventory, equipment, and expansions
Cash flows vary over time
Cash pays the entrepreneur!

25. Cash flows through a business in a circular manner.
Basic Finance
Cash flows through a business in a circular manner.
Purchases
Cash
Sales
Accounts
Receivable
Accounts
Payable

26. Basic Finance Components of Cash Flow: Inflows/Income:
Owner’s Cash on Hand
Cash Sales
Accounts Receivable
Loans Received
Investors Cash

27. Basic Finance Components of Cash Flow: Outflows/Expense:
Inventory Purchased
Operating Expenses
Insurance, Utilities
Employee Salaries
Repay Loans
Taxes

28. Basic Finance Making Projections: Be honest
Base forecasts on defensible data
Complete “what-if” scenarios
Be accurate

29. Basic Finance Example Cash Flow Day 1 Day 2 Day 3 Day 4 Day 5
Beginning Balance
$25.00
($5.00)
$12.50
$16.00
$14.50
Cash Receipts $
$ 12.50
$8.50
$3.50
$7.00
Loan Receipts $ $
Owner's Investment, Outside Resources
Total Cash Available
$32.50
$7.50
$21.00
$19.50
$21.50
Cash Disbursements
Purchases (Cost of Goods Sold)
$ 30.00
Advertising Expense $
Wages Expense $
$ 5.00
Utilities Expense
Miscellaneous Expense
Total Cash Disbursement
$37.50
Ending Balance
$16.50

31. Basic Finance Methods of improving cash flow:
Lease equipment versus purchasing
Hire contract labor
Exchange products/services instead of paying cash

32. Basic Finance Methods of improving cash flow continued:
Negotiate favorable rent terms
Monitor accounts receivable
Negotiate prepayment on new orders
Give discounts for cash
Use MASTERCARD, VISA wisely

33. Income Statement

34. Basic Finance Definition:
The income statement is a summary of the revenues and expenses of the business for a specific period of time.
Usually reported monthly and cumulative by month throughout the year.

35. Basic Finance Example Income Statement Income statement format:
Sales $5000
Cost of goods sold (-) $1600
Gross profit $3400
Operating expense:
Marketing expenses (+) $800
Salary expenses (+) $400
Utilities expense (+) $200
Total operating expense (-) $1400
Operating income $2000
Interest expense (-) $100
Earnings before taxes $1900
Income tax (-) $532
Net Income $1468

36. Ratio Analysis

37. Basic Finance Ratio Analysis: A ratio is a comparison of two numbers.
Management, bankers, creditors, financial analysts, and others use ratio analysis to evaluate and compare financial information within a company, between companies, and within industries.

38. Basic Finance Why do we calculate financial ratios? Evaluation
Comparison
Projections Remember, when doing any type of financial analysis, we are looking at current and trend.

39. Basic Finance Ratio Analysis Types: Profit Ratios Liquidity Ratios
Leverage Ratios
Activity Ratios
Growth Ratios

40. Basic Finance Profitability Ratio Definition
Profitability ratios measure a firm’s
financial returns on activities.
Gross Profit Margin
Return on Sales

41. Basic Finance Gross Profit Margin (GPM) GPM = Gross Profit / Sales
Business owners want to maximize GP since it is what pays the operating expenses, purchases assets, and pays the entrepreneur.

42. Basic Finance Return on Sales (RS)
RS = Net Income Before Taxes / Sales
Measure of the profitability on each dollar
sold by the business. Again, we want to
maximize this figure.

43. Basic Finance Common Size/Account Comparison
Entrepreneurs also look at the percentages of each category (usually against sales) to evaluate efficiency.

44. Basic Finance Liquidity Ratios:
Measure a firm’s ability to meet its current financial obligations.
Current Ratio
Quick Ratio

45. Basic Finance Current Ratio (CR)
CR = Current Assets / Current Liabilities
Rule of Thumb = Should be at least 2, but larger the better.

46. Basic Finance Quick Ratio (QR)
QR = Current Assets – (Inventory / Current Liabilities)
Rule of Thumb = Should be at least 1 , but the larger the better.

47. Basic Finance
Liquidity ratio continued

48. Basic Finance Leverage Ratio Definition:
measures the amount of funds provided by the entrepreneur compared to the amount of funds provided by creditors.
Debt Ratio

49. Basic Finance Debt Ratio (DR) DR = Total Liabilities / Total Assets
Rule of Thumb = Creditors want a moderate DR for financial flexibility; owners may want a higher DR for control or return issues.

50. Basic Finance
Leverage ratio continued

51. Basic Finance Activity Ratio: Month 1 Net Income Month 2 Net Income
Growth Ratio: Month 1 Activity Ratio
Month 2 Activity Ratio

52. Basic Finance Conclusion
An entrepreneur must be creative in developing the financial package.
An entrepreneur must remember to seek as many unique means as possible to limit financial risk while obtaining the necessary capital.